Written By
Erasto Philip

What is Proof-of-Work

March 10, 2022

Decentralization is one of the most important characteristics of blockchain technology, and a key inspiration for the foundation of cryptocurrencies. Broadly, decentralization means there is no central authority determining which transactions on a blockchain are true and which are not. But somehow, the network's participants need to validate transaction data. They do this with algorithms called consensus mechanisms that validate that the transaction data recorded on the blockchain is correct.

Proof-of-Work and Proof-of-Stake are the most widely used algorithms today. This article focuses on Proof-of-Work, the oldest and most well-known consensus algorithm in web3.

The Basics: What is Proof of Work?

Proof of Work (PoW) is a consensus algorithm that requires blockchain network nodes to perform extremely complex computations (algorithm calculations) in order to validate transactions.

The blockchain network gives a block reward to the first node that successfully completes all of the necessary computations. Once a winner is determined, that node validates the validity of the data in the block. Other network nodes then quickly and easily check the accuracy of the outcome. Essentially, nodes battle for the honour of being the first to complete the task and collect the reward.

While the Proof-of-Work algorithm is now closely associated with cryptocurrencies, a fun fact is that a similar algorithm was first suggested in 1993, in a research paper devoted to spam prevention. However, it wasn't until the introduction of Bitcoin and the start of the cryptocurrency era that this algorithm found widespread use.

How Does Proof-of-Work… work?

Proof-of-Work is run by network validators called “miners” that provide the computational power necessary to compete for the block reward, validate transactions, and generate new blocks. The network must create rules to pick a miner who will have the right to produce the next block in the chain to reward miners for their efforts.

The following is a basic summary of how the PoW algorithm works:

  • Network users conduct transactions by sending cryptocurrency to one another.
  • “Blocks” of transactions are created by combining all transactions completed over a certain time period.
  • Miners race to use their computing power to solve a complex mathematical puzzle. Those equations necessitate a significant amount of computing power.
  • The authenticity of transactions within blocks is validated first by the miner who solves the puzzle first, and is then confirmed by other miners.
  • The first miner to solve the puzzle receives a block reward. In the case of Bitcoin, the reward is a predetermined amount of bitcoin, which is also the only way new bitcoin enters the market.
  • Once the validation is complete, the blockchain adds the block of checked transactions to the end of the chain of blocks making up the ledger.
  • The process begins again.

Pros and Cons of Proof-of-Work

One of the greatest benefits of Proof-of-Work is that it effectively defends the blockchain network from hacking attempts by making them extremely difficult and expensive. Furthermore, the more miners in the network, and the more distributed the network, the less vulnerable it is to hacking attempts. A Proof-of-Work blockchain is highly secure.

However, Proof of Work has a number of significant flaws that have contributed to the creation of alternative consensus algorithms. As the popularity of cryptocurrencies increases, more and more individuals are setting up mining networks to race to receive the block reward, which can be lucrative.

As a result of the competition, the energy consumption of Proof-of-Work blockchains is very high, and computation is inefficient. Just a few years ago, miners could compete and successfully win Bitcoin’s block reward with a really good at-home computer that had a good graphics processing unit (GPU). Today, miners must put together massive mining rigs made up of efficient, costly, and highly-specialized equipment known as application-specific integrated circuits (ASICs).

The cost of mining equipment introduces an interesting new problem that has the potential to compromise Bitcoin’s most important feature: its security and decentralization. If mining becomes unaffordable for ordinary users, blocks and transactions can only be confirmed by wealthy individuals and corporations with large mining farms. If the owners of broad mining capacities begin to control the network's laws, centralization increases.

Given the growing inefficiency of Proof-of-Work and the risk for a decrease in security and decentralization of these networks as they become more expensive for the average miner to participate in, blockchains like Ethereum are exploring other consensus options, like Proof-of-Stake.

Zapper supports several proof-of-work chains.
Get started tracking your multi-chain portfolio on our dashboard!

Related Posts